From the efficient markets hypothesis to the behavioral finances theory

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From the efficient markets hypothesis to the behavioral finances theory

Journal Title: Економічна теорія та право - Year 2018, Vol 3, Issue 34

Abstract

Problem setting. Behavioral finance has been actively developing over the past decades as a response to the inability of traditional finance to explain a number of anomalies that arise in the financial markets due to the systematic deviation of the economic actors’ behavior from the rationality principle. Understanding of behavioral aspects can explain the markets ineffectiveness, assess their current state and probable changes in the future more accurately, identify peculiarities of irrational financial behavior of professional and nonprofessional investors. Recent research and publications analysis. The founders of behavioral finance are D. Kaneman, A. Tverski, R. Thaler, R. Schiller. They began a productive discussion with the representatives of the neoclassical direction on the problems of financial markets inefficiency. Various aspects of behavioral finance and their evolution are studied by N. Barberis, V. De Bondt, R. Vishny, J. Ritter, M. Statman, H. Shefrin, A. Schleifer etc. In Ukraine this direction is represented by the works of P. Ilyashenko, N. Karpishin, T. Kizima, M. Lipych, and others. Meanwhile the issue of analyzing behavioral factors in the process of financial decisions making has not yet been sufficiently highlighted. In particular, the theoretical and methodological principles of this direction are needed the further research. Paper objective. The purpose of the article is to study the theoretical basis of behavioral finance compared to traditional finances, generalization and systematization of the basic principles and tools of the behavioral approach to the study of the process of financial decisions making. Paper main body. The basis of the behavioral finance is the following assumptions: the behavior of the subject is a combination of rational and irrational decisions; behavioral portfolios are considered as pyramids consisting of several levels, each of them has a separate «mental account»; there are some obstacles that make it difficult to find and adhere the rational ways of saving and spending; markets are not effective, investors make mistakes in processing information and therefore their reaction to it is not always adequate; arbitration possibilities are limited. Behavioral finances are based on the principles of limited rationality, limited willpower and limited selfishness. At the micro level, individual investors decision-making is considered and the deviations in their behavior from the rational one are analyzed. The tools of micro-behavioral finance are psychological concepts and heuristics. Subjective factors that determine behavioral deviations can be divided into two groups: emotional factors (self-confidence, optimism, self-attribution, the endowment effect, the illusion of control) and cognitive processes (factors of incorrect assessment of available information). At the macro level, the behavior of economic actors that determines asset prices, affects market efficiency and arbitrage facilities is investigated. Conclusions of the research. The theoretical and empirical research on behavioral finance proves that in an economy where rational and irrational actors interact, irrationality can have a significant and long-term impact on markets and economic behavior. As a result of studying the irrational nature of the actors’ behavior in the financial market, the new models have emerged. They have greater predictive capabilities and wider coverage of financial and economic phenomena. As the market anomalies have a devastating effect on the welfare of both individual actors and society as a whole, it is necessary to take measures to prevent them. Such prevention can take place only if investors are more aware of their psychological and behavioral constraints. Therefore, behavioral finances contain prospects for a better understanding of the behavior of the financial market and opportunities for investors to make better investment decisions based on understanding potential pitfalls. Short Abstract for the article Аbstract. In the article the essence of behavioral finance is considered, the special attention is paid to the comparative analysis of the theoretical foundations of traditional and behavioral finance. The main principles of the behavioral approach concerning the process of financial decisions making are highlighted. The structure of the behavioral finance theory is described and its tools are systematized.

Authors and Affiliations

Ольга Олександрівна Набатова

Keywords

behavioral finance; efficient markets hypothesis; irrational behavior; cognitive mistakes; heuristics; limits of arbitration; prospective theory; framing.

EP ID EP437882
DOI 10.31359/2411-5584-2018-34-3-36
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